SEC Investigating Ex-Oppenheimer Executive for Securities Law Violations
According to Bloomberg.com, Robert Okin, Oppenheimer & Co.’s (OPY) former retail brokerage head, is under investigation by the Securities and Exchange Commission. In October, the agency’s enforcement division notified Okin that, based on a preliminary determination, it intended to file charges against him for securities law violations, including failure to supervise.

Okin is no longer with Oppenheimer. He resigned earlier this month to pursue “other interests.” Okin denies violating the Securities Exchange Act.

Marwood Group LLC May Be Subject to Insider Trading Charges
Earlier this month, the SEC notified Marwood Group LLC that it is looking to bring an enforcement action against the Washington policy-research firm for insider trading.

The Commission is looking at whether Centers for Medicare and Medicaid Services officials gave the firm inside information about funding for Provenge, a prostate cancer drug. The product’s manufacturer, Dendreon Corp. (DNDNQ), saw its shares drop before the CMS decided to cut coverage on the medication in 2010, as opposed to after.

According to the regulator, a year before the CMS cut coverage, a CMS employee allegedly gave a Marwood employee insider information about the reduction. A week after the reduction was officially announced, the political intelligence put out a research report that included details about the change in coverage

A Marwood spokesperson maintains that the firm did nothing wrong, noting that no one benefited financially from the information. However, SEC officials have said that such a conversation is the equivalent of insider trading.

In July, the regulator sent S & P a Wells notice notifying it that the agency was pursuing an action linked to six commercial mortgage-backed securities ratings from a few years ago. The purported violations involve the public disclosure and rankings that the credit rating agency made about the securities.

It was in 2011 that the S& P withdrew the grades it issued for a CMBS offering that came from Citigroup (C) and Goldman Sachs Group (GS). This caused both institutions to drop the deal after its placement with investors.

Goldman Sachs Group Inc. (GS) will pay $3.15 billion to buy back residential mortgage-backed securities related to bonds that were sold to Freddie Mac and Fannie Mae. The repurchase represents an approximately $1. 2billion premium and makes the mortgage companies whole on the securities. The RMBS case was brought by the Federal Housing Finance Agency.

It was in 2011 that FHFA sued 18 firms to get back taxpayer money from when the U.S. took control of Freddie and Fannie after the economy tanked in 2008. Goldman is the fifteenth bank to settle.

The firm will pay Fannie May $1 billion and $2.15 billion to Freddie Mac for the securities. The two had purchased $11.1 billion from Goldman Sachs. A few of the other banks that have settled with the FHFA include Morgan Stanley (MS), JPMorgan Chase (JPM), and Bank of America Corp. (BAC). The agency’s remaining RMBS fraud cases still pending are those against RBS Securities Inc. (RBS), HSBC North America Holdings Inc., (HSBC), and Nomura Holding America Inc. (NMR).

In June, Goldman and a couple of the now remaining defendants asked U.S. District Judge Denise Cote to reconsider her earlier ruling that FHFA did not wait too long to sue the banks over the RMBS. They've wanted the cases against them dismissed.

Their latest attempt to have the claims tossed out was a result of a recent U.S. Supreme Court ruling. In that decision, the court determined that a federal law did not preempt a state-law statute that put time restrictions on filing an applicable complaint even if a plaintiff was unaware it had a claim. Earlier this month FHFA pointed to a ruling by an appeals court that let the National Credit Union Administration push securities cases against banks even though there were potential issues regarding time limits.

The Financial Industry Regulatory Authority has issued a censure that fines Goldman Sachs & Co. (GS), Merrill Lynch, Pierce Fenner & Smith Inc., and Barclays Capital Inc. $1 million each. The firms are accused of not submitting accurate and complete data about trades conducted by them and their customers to the SRO and other regulators. This information is known as “blue sheet” data. Firms are legally required to give regulators this information upon request.

Blue sheets give regulators specific information about trades, including the name of a security, the price, the day it was traded, who was involved, and the size of transaction. This information is helpful to identify anomalies in trading and look into possible market manipulations.

The three firms, which all have a prior history of submitting inaccurate blue sheet data, settled the charges without denying or admitting to the allegations. Meantime, FINRA has also put out a complaint against Wedbush Inc. also over submitting inaccurate blue sheet information. That case, however, has not been adjudicated yet.

FINRA Gives the Public Access to Dark Pool Data
To enhance market transparency and boost investor confidence, this week FINRA started providing data about the activity levels in all of the different alternative trading systems. This includes information pertaining to dark pools.

Currently, ATSs are involved in a significant chunk of OTC trading in exchange-listed equities located in the US. Although trades in ATSs have been available in real time to professionals and investors via securities information processors, they are not typically attributed to specific dark pools.

The newly available data should allow the public to see how many shares were traded each week in each dark pool. The information can be found on FINRA’s website and is free.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors in arbitration and in court. Contact us to find out whether you have reason to pursue a securities claim. Your consultation with one of our FINRA arbitration lawyers is free.

Goldman Sachs (GS) Group Inc. said it is under scrutiny in probes related to high-frequency trading and whether its hiring practices comply US antibribery laws. This is the first time the firm has publicly disclosed both investigations. The information was made available via Goldman’s quarterly filing with the SEC.

In the bank hiring practices investigation, Credit Suisse Group Ag (CS), Morgan Stanley (MS), UBS AG (UBS), and Citigroup (C) are also under scrutiny. The Securities and Exchange Commission wants to know whether the banks or their staff hired the relatives of well-connected officials in Asia, which could be a violation of the antibribery laws—in particular, the Foreign Corrupt Practices Act, which prevents companies from giving foreign officials items of value in exchange for business. Although it isn’t illegal to hire government officials’ relatives in Asia, hires cannot just be made for the purpose of earning new business.

As for the high-speed trading probe, the US Justice Department, the SEC, New York Attorney General Eric Schneiderman, and the Federal Bureau of Investigation are assessing trades that engage in fast algorithmic trading. Schneiderman wants to know if firms involved in high-speed trading have secret deals with trading venues, such as dark pools and stock exchanges, that lets them trade before other investors.

Goldman has Sigma X, which is a dark pool trading operation. Recently, the firm has been weighing whether to shut it down amidst the growing criticism over this kind of private stock-trading venue. (In 2011, Sigma X experienced a pricing malfunction and customers were not paid correctly for transactions. Goldman reimbursed them the losses.)

In dark pools, investors get to be more anonymous than in public markets. Recent technological glitches in the stock market, however, have emphasized the risks involved in running private trading platforms. The Financial Industry Authority is also looking at the way brokers use dark pools to make trades and route customer orders.

Goldman is currently a defendant in a class action securities case over high-speed trading. The Rhode Island capital of Providence proposed the lawsuit for investors who bought stock in the US between 2009 and now.

Goldman and the other defendants, JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Morgan Stanley (MS), and Citigroup Inc. (C) , are accused of working with stock exchanges run by NASDAQ OMX Group Inc., BATS Global Markets Inc., Chicago Board Options Exchange, and Intercontinental Exchange's New York Stock Exchange to manipulate the markets while engaging in fraud. As a result, contends the high-frequency trading lawsuit, every year, billions of dollars were diverted from the sellers of securities and its buyers.

Goldman Sachs Wants Third Circuit To Look at Vacated Arbitration AwardGoldman Sachs (GS) wants the U.S. Court of Appeals for the Third Circuit to look at a decision by a lower court to vacate a FINRA securities award issued by a panel member that included arbitrator Demetrio Timban, who was indicted on criminal matters and suspended. The securities case is Goldman Sachs & Co. v. Athena Venture Partners LP and involves an investor accusing the firm of making misrepresentations. The U.S. District Court for the Eastern District of Pennsylvania remanded the award, which favored the financial firm.

The district court said FINRA didn’t give the parties three arbitrators who were qualified and said the respondent’s rights were prejudiced. Judge J. Curtis Joyner said that therefore, a “final and definite award” was not issued. Following the scandal involving Timban, FINRA said it now would perform yearly background checks of arbitrators and other reviews before they are given a case.

District Court Says Buyers Who Are Not Broker-Dealer’s “Customers” Cannot Compel Arbitration
A district court has preliminarily enjoined an arbitration proceeding involving real estate investments. In Orchard Sec. LLC v. Pavel, the U.S. District Court for the District of Utah said that buyers were not a managing brokerage firm’s “customers” and did not have the right to compel arbitration under the SRO’s rules. The court also said that as the plaintiff firm Orchard Securities clearly demonstrated that its chances of success on its claim’s merits.

Margaret and Michael Pavel had filed an arbitration proceeding with FINRA contending that they had securities claims involving their purchase of tenant-in-common interests, including a New York offering that Orchard Securities LLC managed as a brokerage firm. Orchard Securities contended that it could not be made to arbitrate because there was no arbitration agreement or facts showing that the Pavels were its customers and therefore could compel arbitration. The NY offering had been recommended by a registered rep. with Direct Capital, which was a third-party broker-dealer enlisted by Orchard Securities.

Three Governors Are Elected to SRO’s Board, Four Are Reappointed
FINRA says that its members have elected two industry governors: Robert Keenan, who is St. Bernard Financial Services CEO, and James D. Weddle, who is Edward Jones’s managing partner. Keenan was elected small firm governor, while Weddle will be his large firm counterpart. Shelly Lazarus, who is an ex- Ogilvy & Mather chairman and CEO, was named a public governor.

Four other governors received reappointments to the board, which oversees FINRA. The board is comprised of 22 people—10 industry governors and 11 public ones. FINRA’s CEO also has a seat.

Flatiron Systems LLC Owner Pleads Guilty to Mail Fraud
In United States v. Howard, investment company owner David Eugene Howard has pleaded guilty to mail fraud charges. He is accused of engaging in a financial scam that obtained about $1.8 million from investors.

Prosecutors say that Howard, who owns Flatiron Systems, used operating agreements, letters, and account statements to make false representations that his company used a proprietary system named “Pathfinder” to trade pooled equity accounts. The Securities and Exchange Commission has submitted an enforcement action against Howard.

Three Ex- Bank of the Commonwealth Executives Get Fraud Conviction
Edward Woodard, his son Troy Woodard, and Stephen Fields, three former Bank of the Commonwealth executives were convicted on charges related to their alleged scam many believe was the cause of the bank’s demise in 2011. Convicted along with them is Dwight Etheridge, a favored borrower.

The federal government says that starting in 2006 the bank took on high-risk deposits to try to expand the business’s geographic base. By 2008, a lot of the banks’ loans were purportedly administered and funded in a manner that ignored the bank’s internal controls, as well as industry standards. Edward and Fields are accused of disguising the bank’s financial state.

Ex-MetLife Broker’s Criminal Sentence for Elderly Fraud is Affirmed by 7th Circuit
An appeals court has affirmed the 210-prison sentence that Victoria McGee Harris, an ex- MetLife Inc. (MET) broker, received after pleading guilty to criminal charges accusing her of stealing millions of dollars from her clients (primarily elderly seniors). Harris diverted these investors’ funds eighth years, purportedly using the money for her personal spending. MetLife settled with Harris’s clients by paying them over $7 million.

Appealing her prison sentence, Harris had said that its duration was unreasonable and that the district court acted improperly by counting married couples as two separate victims for the purposes of determining her prison term. The 210-month sentence she received is at the top of the guideline ranges. However, the Seventh Circuit found that the district court did not err when determining the sentence length.

Ex- Wasson Capital Ltd. Present Gets 30 Months in Prison for $2.3M Ponzi Scam
In United States v. Sekaran, the U.S. District Court for the Southern District of New York sentenced ex- Wasson Capital Ltd. president Anand Sekaran to 30 months behind bars for his involvement in a $2.3 million Ponzi scheme. Sekaran must pay $2.26 million in restitution, $2.3 million in forfeiture, and a $200 special assessment fee.

Sekaran is accused of soliciting about $6 million from clients for call and put options. However, when the investments began failing, he didn’t tell investors. The government said that instead, he misrepresented the health of the investments, misrepresented to clients how their money was being used, misappropriated approximately $500,000 and caused investors to lose some $2 million. In addition to entering a guilty plea, Sekaran and his firm settled the related civil case against them.
The SEC's Order Against Howard (PDF)

A Financial Industry Regulatory Authority Panel is ordering Goldman Sachs & Co. (GS) to pay about $2.5M to Tracy Landow for recommending that she invest in the Goldman Sachs Special Opportunities Fund 2006, which she is now contending was an investment that was not appropriate for her. Landow filed her arbitration claim against the unit and her broker a couple of years ago, claiming that unauthorized trades were made. She also alleged misrepresentation and failure to supervise.

The FINRA arbitration panel determined that Goldman liable, ordering the financial firm to compensate the claimant with $1.6M in damages plus about $1M in interest and additional fees. Broker John D. Blondel, Jr., however, was not found responsible. The panel determined that he did not play a part in the alleged investment sales-related violation, theft, forgery, misappropriation, or fund conversion and he was not accountable for the private equity fund and the transactions that resulted. It is recommending that his name be expunged from the case.

Meantime, Landow’s interest in the fund will go back to the financial firm within 30 days from the award date.

FINRA Arbitration
If you believe that your investment losses were a result of broker negligence, you may have grounds for filing a claim with FINRA. It is important that the investment your financial firm recommended to you was suitable for your needs and goals and did not place you at risk of suffering huge losses that your account could not handle.

At Shepherd Smith Edwards and Kantas, LTD, LLP, it is our business to recover securities losses on behalf of our clients. Contact our FINRA arbitration law firm today.

While regulators continue pondering whether to impose more regulations on money market mutual funds, a number of financial institutions, including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Fidelity Investments, BlackRock Inc. (BLK), Bank of New York Mellon Corp. (BK), Federated Investors Inc. (FII), and Charles Schwab Corp.,(SCHW), started disclosing the market-based net asset values of these funds last month. Reasons given for these disclosures included offering greater transparency and giving investors more information about the market. However, some believe there are firms are issuing these disclosures because that is what their competitors are doing.

Currently, money market funds have a $1/share stable net asset value for all investor transactions. The underlying assets of the funds, which are debt securities with high ratings, however, can undergo periodic, small value changes that may slightly affect a fund’s per share market value. This is also called the shadow price, which are reasonable estimates/fair valuations of the price that an instrument could be sold at in a current trade.

A few years ago, the Securities and Exchange Commission approved modifications to its Rule 2a-7 and other rules about money market funds mandating that managers of the funds reveal changes to portfolio holdings and give the regulator the market-based net asset values of the funds. Fund information for each month has to be given to the SEC at a succeeding month. The Commission then makes the information available to the public 60 days after the month to which the data pertains has concluded. These Daily disclosures would make the data more immediate (and relevant) for investors.

Late last year after then-SEC chairman Mary Schapiro failed to convince most of her fellow commissioners to accept the Commission’s rule proposals, the Financial Stability Oversight Council put out proposed recommendations to modify MMF’s regulatory treatment while insisting that fund reforms are key to protecting financial stability. FSOC then went on to seek public comment on three options: allowing part of investors’ redemption requests to be delayed, letting fund NAVS float freely, and other measures, such as tighter qualifications for investment diversification and greater minimum liquidity levels.

Now, the SEC is also developing its own proposal. Should the Commission put out its own rule, the FSOC is unlikely to issue one also.

Having experienced legal representation increases an investor’s chance not just of recouping losses but also more, if not all of their lost investment than if he/she were to go it alone. Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm that represents investors throughout the US. If you believe that you were the victim of money market fund fraud, contact our stockbroker fraud lawyers to ask for your free case evaluation.

In US District Court in Boston, a federal jury has decided that Goldman Sachs (GS) isn’t at fault for the $250M sustained by the owners of Dragon Systems Inc. after they sold their speech recognition company to Lernout & Hauspie Speech Products for $580M. Goldman had served as adviser to Dragon over the deal.

L & H, which is based in Belgium, went bankrupt after the acquisition amidst reports that it was inflating its sales figures and revenue and fabricating customers. The company’s top executives went to jail.

Plaintiffs Janet and James Baker, who own Dragon, had accused Goldman of negligence for failing to detect the fraud that was taking place L & H. Their lawyer claims that the financial firm took the job despite lacking the experience needed to properly sell this type of technology company. Dragon paid Goldman $5 million for its services. (The Bakers have already settled other cases related to the L & H acquisition of Dragon for $70M.

Meantime, Goldman’s legal team has argued that while it was the bank’s job to serve in an advisory capacity during the acquisition, discovering whether/not crimes were being committed at the Belgian company was not. They also contend Dragon disregarded Goldman’s advice that it should retain outside accountants to examine L & H’s books and, instead, entered into the sale too fast.

Goldman Sachs (GS) and Morgan Stanley (MS) have agreed to collectively pay $557M to settle complaints accusing them of wrongfully foreclosing on homeowners. Under their respective agreements with the Federal Reserve, Morgan Stanley will pay $227M while Goldman will pay $330M.

Approximately 220,000 people who lost their homes due to “robo-signing” and other abuses could receive compensation as a result. Per the agreement with the two investment banks, they will pay $232 million in cash to compensate homeowners. This will conclude the loan files review against the two banks that were ordered in 2011. Cash payments will vary and may go as high as $125,000 to borrowers whose homes foreclosed in 2009 and 2010. $325M will go toward lowering mortgage balances and forgiving outstanding principal on home sales that made less than what borrowers owed on mortgages.

The deals stuck by Morgan Stanley and Goldman Sachs is similarly structured to the $8.5B one reached last week with JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), PNC Financial Services (PNC), MetLife Bank (MET), SunTrust (STI), Sovereign (SOV), Aurora, and US Bank. They are paying 3.8 million homeowners approximately $3.3 billion to conclude the foreclosure review. $5.2 billion is for forgiveness of principal and mortgage modifications. Ally Financial and HSBC are in talks to work out similar settlements. The Fed reports that now, over 4 million borrowers will receive cash compensation.

These latest mortgage settlements come nearly one year after the US government and 49 state attorneys general reached an “unprecedented” deal that involved Citigroup, Bank of America, Wells Fargo, JPMorgan Chase, and Ally Financial when they agreed to pay $25 billion to settle allegations of abusive foreclosure practices related to the housing market crisis.

Aside from the rob-signing debacle, which involved banks approving foreclosures without making sure that they were warranted or retaining workers who signed bogus signatures on fake documents to get houses through the foreclosure process faster, other wrongdoings that allegedly occurred include the use of deceptive tactics when offering loan modifications, the improper filing of documents in bankruptcy court, and not offering offer borrowers other options prior to foreclosure.

In other industry news, Goldman Sachs is thinking about selling its reinsurance. A main reason for this is Basel III capital rules, which compel banks to look at non-core businesses that are exiting. Goldman Sachs Reinsurance Group is with its securities division in New York.

Securities Fraud
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Goldman Sachs Fined$1.5 Inadequate Supervision in $118M Fraud
The Commodity Futures Trading Commission says that Goldman Sachs (GS) must pay $1.5M because it did not properly supervise trader Matthew Marshall Taylor, who allegedly got around internal systems to manually make fabricated trades that went straight to the financial firms’ records and books and not the exchange. Taylor is accused of defrauding the bank, which lost about $118.4M.

The agency says that Goldman failed to make sure that its risk management, supervision, and compliance programs were in alignment with its duties to diligently oversee its business as a registrant of the Commission. However, CFTC commissioner Bart Chilton has criticized the $1.5M fine, describing it as a wrist slap.

CFTC Names Firms and Individuals in Precious Metal Scam The Commission has filed a civil injunctive enforcement action against a number of firms, including Hunter Wise Credit, LLC, Lloyds Commodities Credit Company, Hard Asset Lending Group, Blackstone Metals Group, LLC, CD Hopkins Financial, Newbridge Alliance Inc., Harold Edward Martin Jr., United States Capital Trust, LLC, as well as related entities, and Fred Jager, Frank Gaudino, James Burbage, Chadewick Hopkins, Baris Keser, David A. Moore, and John King. They are accused of fraudulently marketing off-exchange commodity contracts that were illegal. Also, Hunter Wise Commodities, which allegedly orchestrated the fraud, is accused of having gotten least $46M in client funds since July of last year.

The defendants allegedly claimed that they were selling physical metals to retail clients in retail commodity transactions and that they would arrange loans for the balance of the purchase price. Customers were supposed to make down payments at 25% of the complete buying price for certain quantities of metal, which were to be placed in a safe depository. The CFTC contends, however, says that not only were certain statements found in the investment contract untrue, but also the transactions were merely paper transactions with no actual metals involved.

Defendants to Pay $1.8M in Off-Exchange Foreign Currency Scheme
Following a CFTC anti-fraud enforcement action, a permanent injunction order and default judgment has been issued against Forex Capital Trading Partners, Inc., Forex Capital Trading Group Inc., and Highland Stone Capital Management, LLC requiring that they pay a penalty of over $1.3M and disgorge $450,764 to benefit clients who were defrauded. The Commission says that the three firms made fraudulent solicitations to 106 clients that invested over $2.8M in forex trading.

These solicitations were allegedly made with false claims that they were engaging in this type of trading had been profitable for several years, including a falsely reported 51.94% customer gain in 2010, which was a year when the investors actually lost over 1.2M. In fact, says the Commission, customers actually lost over 93% of total invested principal via the defendants’ customer trading.

The U.S. District Court for the District of Nevada has rejected Goldman Sachs & Co.’s (GS) bid to arbitrate its dispute with the city of Reno, Nevada. The financial firm had sought to stop a Financial Industry Regulatory Authority proceeding over its underwriting of $210 million in ARS. Per Judge Robert Jones, even though there was no arbitration agreement, that the city paid Goldman to facilitate the securities’ auctions makes Reno a customer of a FINRA firm member for the purposes of arbitration. The case is Goldman Sachs & Co. v. City of Reno.

Recounts the court, Reno had issued about $210 million in auction-rate securities to fund a number of projects in 2005 and 2006. Pursuant to their underwriter and broker-dealer agreements together, Goldman was to underwrite and broker the ARS. While the broker-dealer arrangement included a forum selection clause allowing for any lawsuits stemming from the agreement to be heard in Nevada district court, it did not (nor did the underwriter agreement), come with an arbitration provision.

Reno began FINRA arbitration proceedings against the brokerage firm in early 2012 claiming that Goldman had committed wrongdoing under the terms of the agreements. Goldman countered with this case, requesting that the court find that the FINRA forum was inappropriate for resolving this dispute, per the forum selection clause, and because there was no arbitration clause between the two parties. Goldman also sought preliminary injunction against the proceedings.

The district court said no to the request for relief, observing that a party that wants injunctive relief has to show that success on the merits was likely, which it said Goldman did not do. It also said that, according to FINRA arbitration code, parties have to arbitrate any dispute between a member and its customer that involves the member’s business activities. As for the forum selection clauses found in the broker-dealer agreement, the court said that although these don’t directly address the matter of arbitration, they also don’t disallow for arbitration if that is what is needed.

The court disagreed with Goldman’s contention that FINRA rules don’t apply because the ARS are municipal securities and therefore influenced by Municipal Securities Rulemaking Board rules, which don’t include muni issuers under the customer definition. It pointed out that, according to the SEC, MSRB members are also subject to FINRA arbitration just like FINRA members. Also, Goldman is both an MSRB member and a FINRA member.

Judge Jones noted that even if FINRA finds that Reno’s claims have more to do with the brokerage firm’s underwriting than its auction facilitation services, the issue of arbitrability is for the arbitrator and not the court.

After surrendering to federal authorities today, Rajat Gupta has entered a not guilty plea to the criminal charges against him involving insider trading. Gupta, who was a former Proctor and Gamble and Goldman Sachs director, is accused of multiple counts of securities fraud and one count of conspiracy to commit securities fraud. He allegedly gave Galleon Group cofounder Raj Rajaratnam corporate secrets about Goldman. Our stockbroker fraud law firm has been following Rajaratnam’s criminal case on our blog site. (See below.) Earlier this month, he was sentenced to 11 years in prison over an insider trading scam that illegally garnered $63.8 million.

Gupta, who also once was a global head at McKinsey & Co., came under close scrutiny during Rajaratnam’s trial when he was brought up in testimony and phone conversations that were recorded in secret. He is also now facing civil charges with the Securities and Exchange Commission, which contends that he provided Rajaratnam with illegal tips about both Proctor and Gamble and Goldman Sachs’ quarterly earnings and an approximately $5 billion investment that Berkshire Hathaway was planning to make in the financial firm. Based on Gupta’s tips, Rajaratnam avoided losses of/made illegal profits of over $23 million. Rajaratnam made over 800,000 in illegal profits from the Berkshire Hathaway tip when, after first having Galleon funds buy over 215,000 Goldman shares, he ordered the liquidation of the Goldman holdings a day after the information and Goldman’s public equity offering became public.

Rajaratnam also made over $18.5 million in illegal profits for Galleon funds after Gupta allegedly told him that Goldman had positive 2008 second quarter financial results. Rajaratnam then had the hedge fund buy Goldman securities but liquidated them when Goldman made news of its earnings for that quarter public. Other charges stem from Gupta allegedly notifying Rajaratnam that fourth quarter results for that same year were negative. The Goldman holdings were sold off, allowing Rajaratnam to avoid over $3 million in losses. When Gupta allegedly tipped him about P & G's 2008 4th quarter earnings, Rajaratnam had Galleon funds sell short about 180,000 P & G shares, generating over $570,000 in illicit profits.

According to the SEC, Gupta got his confidential information from board conversations while serving as director at both companies. At the time, Gupta had numerous business ties with Rajaratnam and was seeking to strengthen that relationship. Not only had Gupta invested in Rajaratnam’s hedge funds, but they also began a number of financial ventures together.

The SEC had recently dropped its previous administrative action against Gupta over the insider trading allegations. Following that move, he vowed to drop his lawsuit claiming that the regulatory proceeding had violated his constitutional rights.

Of the 56 people that the government has charged with its crackdown on insider trading, 51 either were convicted or pleaded guilty.

Last week, a whistleblower lawsuit claiming that taxpayers were defrauded when the federal government bailed out American International Group was unsealed. The complaint accuses the Houston-based AIG and two banks of taking part in speculative and fraudulent transactions that resulted in losses worth billions of dollars. They then allegedly convinced the Federal Reserve Bank of New York to bail them out with two rescue loans for AIG that were used to unwind hundreds of failed loans.

The complaint focuses on the two emergency loans of about $44 billion that AIG received in October 2008 (The remaining $138 that it got in bailout funds are not part of this case). The money went toward settling trades involving complex, mortgage-linked securities. Some of the AIG-guaranteed securities were underwritten by Goldman Sachs and Deutsche Bank. Both financial institutions join AIG as defendants in this case. The two loans were extended to buy the troubled securities and place them in Maiden Lane II and Maiden Lane III, both special-purpose vehicles, until AIG’s crisis subsided.

The plaintiffs, veteran political activists Nancy and Derek Casady, contend that the rescue loans were improper because the government made them without obtaining a pledge of high-quality collateral from AIG. They maintain that the Fed board does not have the authority to “cover losses of those engaged in fraudulent financial transactions.”

Their whistleblower lawsuit was filed under the False Claims Act. This federal law lets private citizens sue on behalf of government agencies if they know of a fraud that occurred. Plaintiffs are able to attempt to recover money for the government and its taxpayers. Plaintiffs usually receive a percentage if their claim succeeds.

According to the New York Times, senior fed officials have admitted to taking unusual actions in 2008 because the global financial system was on the verge of falling apart.

The Financial Industry Regulatory Authority says it is fining Goldman Sachs $650,000 for failing to disclose that the government was investigating two of its brokers. One of the brokers was Goldman vice president Fabrice Tourre. FINRA says Goldman did not have the proper procedures in place to make sure that this disclosure was made.

The SEC had accused Tourre of being “principally responsible” for Abacus 2007-AC1, a synthetic collateralized debt obligation, and selling the bonds to investors, who ended up losing more than $1 billion while Goldman yielded profits and hedge fund manager John A. Paulson made money from bets he placed against specific mortgage bonds. The SEC contends that Goldman failed to notify investors that Paulson had taken a short position against Abacus 2007-AC1. This summer, Goldman settled for $550 million SEC charges that it misled investors about this CDO, just as the housing market was collapsing.

Regarding Goldman’s failure to disclose that the SEC was investigating two of its brokers, even though investment firms are required to file a Form U4 within 30 days of finding out that a representative has received a Wells notice about the probe, FINRA says that Tourre’s U4 wasn’t amended until May 3, 2010. This date is more than 7 months after Goldman learned about his Well Notice and after the SEC filed its complaint against the investment bank and Tourre. FINRA also says that Goldman’s “employee manual” for brokers does not even specifically mention Wells Notices or the need for disclosure after one is received.

By agreeing to settle with FINRA, Goldman is not admitting to or denying the charges.

The Securities and Exchange Commission has decided to permanently exempt Goldman & Sachs Co. from a 1940 Investment Company Act provision that would have disqualified the financial firm from serving as a principal underwrite. Goldman and several of its affiliates applied for exemption from ICA Section 9(a) after settling for $550 million SEC securities fraud charges that it made material misrepresentations related to the 2007 structuring and sale of derivative product connected to subprime mortgages.

Under the provision, a person cannot act as a principal underwriter or investment adviser for an investment firm if, due to misconduct, the party in question is enjoined from taking part in any practice or conduct related to the purchase or sale of any security. Goldman, in its application, noted that since the district court had barred it and its affiliates from violating federal securities laws moving forward, the provision would apply to disqualify them from giving advisory services to investment companies.

After granting the broker-dealer a temporary exemption in July, the SEC issued Goldman a permanent one. The SEC noted that the applicants’ behavior did not make it against the “public interest or protection of investors” to grant the permanent exemption.

Regarding the $550 million securities fraud settlement, which is the largest penalty that the SEC has ordered a financial firm to pay, Goldman was accused of misleading investors about a synthetic collateralized debt obligation as the housing market was collapsing. Investors suffered more than $1 billion in financial losses. The brokerage firm admitted that it provided incomplete marketing information for the product and has agreed to reform its business practices.

Goldman, Sachs & Co. has agreed to reform its business practices and pay $550M to settle Securities and Exchange Commission charges that it misled investors about a synthetic collateralized debt obligation (CDO) just as the housing market was failing. By agreeing to settle the securities fraud lawsuit, Goldman is admitting that information in the marketing materials for the product was incomplete.

The SEC case involves Abacus 2007-AC1, one of 25 investment vehicles that Goldman created so that certain clients could bet against the housing market. Unfortunately, when the market did fail, investors lost over $1 billion. Meantime, the investment bank yielded profits and John A. Paulson, the hedge fund manager that the SEC says asked Goldman to create the 2007-AC1, made money from bets he made against certain mortgage bonds.

While investors were told that an independent manager was choosing the bonds, the SEC contends that Goldman allowed Paulson to choose mortgage bonds that he thought were likely to drop in value. However, clients were not notified about Paulson & Co. Inc.’s part in the portfolio selection process or that Paulson had taken a short position against the CDO. The investment bank then sold the package to investors that would only turn a profit if the value of the bonds went up.

The $550 million penalty against Goldman is the largest that the SEC has ordered a financial services company. By agreeing to settle, Goldman is not denying or admitting to the allegations. $300 million of the fine will go to the U.S. Treasury, while $250 million will be repaid to investors that suffered losses.

According to Goldman Sachs Group Inc. Chief Operating Operator and President Gary Cohn, the investment firm adamant that the bank did not bet against its own clients. He says that Goldman Sachs purchased protection against a decline in just 1% of mortgage-backed securities it underwrote since late 2006. Former clients, regulators, and members of Congress are accusing Goldman Sachs of designing mortgage-backed securities that would fail and then betting on their failure to purchase credit-default swaps, which pay out when a default occurs.

Cohn testified last month before the Financial Crisis Inquiry Commission. He says that in the wake of the serious allegations, the investment firm has examined the $47 billion in residential mortgage-backed securities (RMBS) and $14.5 billion in collateralized debt obligations (CDOs) that the firm underwrote since firm executives began to feel the need to treat the subprime mortgage market with caution in December 2006. He claims that by the end of June 2007, Goldman Sachs held $2.4 billion of bonds from CDOs and $2.4 billion of bonds from RMBS trusts. The investment bank had protection for approximately 1% of the total underwritten. Nearly 60% of the derivatives and bonds in the CDOs were from other institutions.

The hearing was called to probe the relationship between Goldman and American International Group Inc (AIG). The investment bank had purchased CDO protection from the insurer. Billions of dollars in federal funds had allowed AIG to stay in business even though it was facing bankruptcy and a number of the insurer’s counterparties, including Goldman, are believed to have benefited. Cohn has argued that all market participants benefited from the government’s assistance.

Barbara Ann Radnofsky, the Democratic candidate for Texas attorney general, says that the state should sue Wall Street firms for securities fraud. Earlier this week, she published a legal brief accusing investment banks of being responsible for the financial crisis. Her Texas securities fraud briefing, which is modeled on the multibillion-dollar tobacco settlements from the 1990’s, is seeking approximately $18 billion in securities fraud damages and other reparations for Texas. She targets Morgan Stanley, Goldman Sachs Group, AIG insurance, and other leading financial firms, banks, and bond-rating agencies.

Radnofsky’s brief is not a securities fraud lawsuit, but it is a framework for one. She hopes that it will push incumbent Texas Attorney General Greg Abbott to take action. She contends that if Abbott fails to sue the firms by September, “he is committing legal malpractice.” She is accusing him of failing to act despite the “clear evidence.”

Radnofsky has noted that the financial meltdown has forced Texas to make cuts to social programs, environmental enforcement, and child protective services. She says the “Great Recession” has lead to child illness, hunger, death, and abuse. She also contends that foreclosures and abandoned homes have severely affected neighborhoods.

Radnofsky launched Suewallstreet.com earlier this week. The Web site includes a petition pushing for Texas and other US states to file a securities fraud complaint against numerous financial firms. The aim is to garner 100,000 signatures. Randofsky, who is an attorney, offered to handle the securities fraud lawsuit at no cost to taxpayers. Soon after Radnofsky launched her appeal, Attorney General Abbott’s office revealed that Texas, other states, and the US Department of Justice are conducting a broad investigation into the Wall Street firms that may have played a key role in the economic crisis.

Shepherd Smith Edwards & Kantas LTD LLP founder and Stockbroker Fraud Attorney William Shepherd is applauding Radnofsky’s move. ““I have no doubts that Wall Street’s actions, including intentional and grossly negligent acts, have caused severe harm worldwide. States such as Texas could be in a unique position to seek relief based on the history of similar suits. States and municipalities have been big losers as a result of financial woes caused by Wall Street and I congratulate Ms. Radnofsky for her efforts.”

It was announced by Reuters News today that regulators at the New York Stock Exchange have fined Goldman Sachs Execution & Clearing Corp. $450,000 in connection with roughly 385 orders to "short" equity securities for clients that resulted in "fail-to-deliver" positions without first borrowing or arranging to borrow the securities as collateral. The nearly 400 infractions occurred in a seven week period in December 2008 – January 2009.

So that timely delivery of the shares sold can be made to buyers, a rule has existed for decades that says investors cannot sell securities short unless arrangements have been made to borrow such securities. Stock shares can be made available to lend by anyone who owns those shares. For example, when margin agreements are signed at a brokerage firms by investors, the agreement contains language which allows their securities to be rented to those seeking to sell the shares short, (The rent charged is almost always kept by the firm.) This can happen at the same brokerage firm or arrangements can be made by one firm to lend available securities to another firm to transact short sales for itself or its clients.

There are have been many examples of "short squeezes", some undoubtedly intentional, in which shares are either not available to meet borrowing demand, or shares previously lent are reclaimed. This caused short sellers to have to scramble to find shares or be "bought in" on the open market. In some situations in the past, the law of supply and demand for shares has caused the price of the stock to rise to two or three times its pre-squeeze price, wiping out the short sellers. Thus, rampant short selling had its own unique deterrent.

It is up to the brokerage community to police the borrowing rule. Through computers, availability of shares can be very easily learned before a short sale is executed. In the "heydays" of day trading firms during the 1990's, day traders would seek to "block up" shares in advance of a short sale to avoid the delay of locating shares when the desired price was reached. (There were some tricks used to try to accomplish this while not telegraphing to professional traders and specialists that short sales were eminent, but we will not attempt a full explanation of these at this time.)

As part of the deregulation which occurred prior to the market crash of 2008-2009, while short sale regulations remained in place, the hard rule of making certain that shares are available at the time the short sale is executed was modified to allow firms to simply act in "good faith" to attempt to locate the shares. As wild flections were occurring in the stock markets during the crash, professional traders often reaped huge profits on short sales. The “good faith” crack in the door for those selling short grew to an open door policy of simply not enforcing this and other short sale rules. While the term "naked shorts" became a part of the culture, this was nevertheless simply deregulation by non-enforcement of the borrowing rule.

There has been no information revealed as to whether the Goldman’s admission of some 400 borrowing rule violations over a 7 week period is indicative of thousands of such violations by Wall Street during the years regulators were looking the other way. However I - for one - would not be shocked to learn that this is a mere "drop in the bucket" of the total borrowing violations which actually occurred. If Goldman claims it is being singled-out on this one, that is likely the truth. However, I quickly learned as a teenager that the defense of "everyone else is doing it" was not going to work with my regulators.